Condensate in the Cockpit: The Pivotal Role of NGLS … · Condensate in the Cockpit: The Pivotal Role of NGLS in the Emerging Shale Revolution By Al Troner ASIA PACIFIC ENERGY CONSULTING

Condensate in the Cockpit: The Pivotal Role of NGLS in the Emerging Shale Revolution

By Al TronerASIA PACIFIC ENERGY CONSULTINGHouston, Texas, USA Phone: +1-281-759-4440 Email: [email protected]

Presentation at Crude Oil Quality Association Meeting Dallas, November 2013

Understanding the Shale Revolution

Like the blind Hindu wise men meeting an elephant on the road

Each describes the beast by the part they can feel; None sees the whole animal

The Shale Revolution consists of a triad of change: For Gas, Natural Gas Liquids (NGLs) and Oil

NGLs are the only grouping that impacts all three hydrocarbon groups, Tight Oil as much as Shale Gas

Condensate is the pivotal NGL for relationship of black oil to gas liquids

It impacts Canada as much as US

1 ASIA PACIFIC ENERGY CONSULTING

“The Future is Now”

Shale development spreading across US

Started as gas focus; shifted to liquids

LNG, then crude, were the focal points

NGLs will impact markets as much as crude

Eagle Ford, Bakken, Permian, Marcellus/Utica main upstream points of focus

Longer Term: Uinta, Niobrara, Cana-Woodford, Monterey (California), Montnay (Canada) basins


US Tight Oil – Key Plays in the Lower 48


Source: Deutsche Bank, Integrated Oils: Oil & Gas for Beginners, p.264

How Big is Big? First Crude

Tight oil rather than shale oil

Recoverable reserve estimates remain loose; many basins still uncatalogued

Eagle Ford (E.F.), Bakken & Permian now mainstays – Plateau at minimum 3.6 MM B/D

Total US some 4.5 MM B/D by 2020

EIA well behind on forecasts; overcompensation?

North Dakota oil output alone same as Malaysia; with Texas mor than UK


“Begin at the Beginning” - Definitions

Gas began the Shale Revolution; liquids sustain it

Liquids, both Black Oil & NGLs; each shale basin differs

Focus on NGLs

NGLs: Liquid molecules suspended in sub-surface gas reservoirs

They precipitate or are stripped from gas

Need specialized containment; Ex: Condensate


NGLs Defined – A Summary


Product Characteristics Sectors

Methane (C1) Dry gas; calorific value only; Piped or LNG GTL feedstock

Power, heating, industry, GTL, methanol, urea/fertilizer

Ethane (C2)Both dry gas & NGL; major value as petchem feedstock; needs pipelines, big gas output

As in methane; also petchem

Propane (C3/LPG)Needs containment; generally stripped from gas; higher capex and opex in transport; safer than butane

Generally home & business; transport use; gas supplement

Butane (C4/LGP) Containment needed; higher BTU value; like propane, high capex & opex

Mainly industrial; also in transport

Condensate (C5+)

Light, sweet crude lookalike; almost always > 50% naphtha; Can be naphthenic or paraffinic; Moderate mid-distillate; once a liquid, remains a liquid; from wellhead or gas processing; some output sold as naphtha

Like crude, full range of products; strong impact on gasoline & petchems; can produce large volume of jet & ADO

Source: APEC

Impact of condensate remains key to understanding crude

Tight Oil: The Nature of the Beast

Different production profiles

Many wells, high-pressure, lumpy supply, limited life

Even Dry shale basins have Wet Spots

Tight Oil usually contains large percentage of field condensate

Therefore light – varying from 37-50 API; Sweet < 0.25%S

All assays have big light-end yield

Crude blends yet to stabilize


Snapshot/1: USGC End-2013

US cannot export crude

Yet sharply increasing tight oil production pushes out imports

Backed-out barrels mainly light, sweet

Houston more storage than Cushing; Tight Oil mainly E.F., Permian, Bakken

How relevant is WTI?; Fragmentation of US prices?


Yield Comparison


Source: Industry

Snapshot/2: USGC End-2013

Almost all light crude has been backed out of USGC

USAC will follow by end-year

Yet condensate volume averaging 45% + in E.F. offered USGC buyers

At what point does EF become unusable for USGC?


A Condensate Primer/1

Usually 50 API or lighter; sweet < 0.25%S; majority naphtha yield

Liquids molecules suspended within gas

Wellhead (lease) condensate precipitates naturally; Plant condensate (natural gasoline) stripped

Wellhead accounted crude; export banned

US crude restrictions warp world market

No restrictions on Canadian, Mexican crude exports


A Condensate Primer/2

Despite similarities condensate is not light, sweet crude

E.F. black oil actually at least 45% condensate, but hidden

As IEA recommended, crude export ban will eventually handicap US Tight Oil output

Yet lifting crude export ban politically unacceptable

Why not simply define lease condensate for what it is, condensate, not crude

Discussion with EIA so far unpromising


Shale Oil Has Revived US Crude Output


Source: BP Statistical Review of World Energy June 2013; APEC

Yet US Tight Oil Already Reshaping Global Crude

Clemenceau: “Generals always fight the last war”

Obama administration caught in shortage mentality

US Tight Oil resulting in avails too light for domestic refining

Plant condensate considered product – can and will increasingly export

Where can extra crude go – Canada – or less known - Mexico (NAFTA)

Impact on Europe: Price pressure on light, sweet crude

And then there is Canada …


PADD-3 Base Refining Capacity

OperatingPlants

CapacityMM B/D

%Share of PADD-3 Base

PADD-3 Base Capacity 54 8.55of which: Texas 6 4.66 54.5%Of which: Complex CoastalRefiners 21 6.38 74.6%

Gulf dominates US refining/petchems

Bigger, sophisticated plant

Top-quality products

Operationally efficient


Source: APEC

Current Canadian Cannards

Canadian bituminous crude output will rise smoothly upward

Canadian bituminous crude costs are almost equal to Tight Oil

If Keystone XL remains blocked, crude will remain trapped in Canada

Developers’ tolerance for escalating capex limitless

Canada will continue to absorb most US plant condensate (diluent)

LNG & Tight Oil are completely separate sectors

For all of the above: “It ain’t necessarily so”


Canadian Oil Sands Output Forecast


Source: RBN; Chart based on CERI production forecast

Canadian Crude: Square Peg, Round Hole

Obama stonewalling forces Canadians to seek alternative markets

Unforeseen – first pipelines from Alberta east to Atlantic, not west to Pacific

Gas development for LNG will cap and then back out US condensate import

Canadian crude producers will continue to limit exposure to Washington’s whims


While Back in the USGC

Condensate bottlenecks base capacity

Secondary needs feedstock to crack

In particular cokers top priority

Can costly secondary be left idle?

Or opportunity crude refused?

Refining Divided: Simple/complex; coker/non-coker; new/depreciated

Or is Asia the natural condensate outlet?


Why USGC Refiners Cautious on Forecast Transport Fuels

US mogas demand (5-year) uncertain; likely short-term decline

Worries of paraffinic naphtha (petchem feedstock) disposal

Keystone XL uncertainty; if approved, when does syncrude arrive?

NGLs will add to gasoline supply; backing out petchem feedstock

Washington may back transport fuel rivals (CNG/LNG/LPG)

Biofuels, EPA regulations increasingly onerous

Current refining alone could produce product overhang


Crystal-Ball Gazing/Crude (In MM B/D)


Source: APEC, Industry

2013 2014 2015 2016 2017 2018 2019 2020Total US Crude (w/Field Cond.) 8.40 8.75 9.00 9.20 9.45 9.90 10.25 10.40 North Dakota (Est. Field Cond.) 0.81 0.87 0.95 1.05 1.20 1.30 1.40 1.45 Texas (Est. Field Cond.) 2.85 3.10 3.30 3.50 3.60 3.80 3.95 4.10

Even conservative outlook underpinned by 10 MM B/D+ US crude

Crystal-Ball Gazing/All NGLs


While NGLs will rise by about 1.3 MMM B/D, much of it in Texas

Crystal-Ball Gazing/LPG


Despite ballooning LPG exports, a supply overhang

Crystal-Ball Gazing/Plant Condensate (In MBD)


Source: APEC, Industry

2013 2014 2015 2016 2017 2018Plant Condensate 340 370 410 450 500 560US Crude (w/Field Cond.) 8,400 8,750 9,000 9,200 9,450 9,900

Forecast excludes petrochemical back-out – making export avails even higher

Condensate Concerns

API is a loose and flexible hurdle; 50 API international norm, 45 API in US

Remains a liquid once becomes a liquid WITHOUT CONTAINMENT – unique among NGLs

Whole condensate almost always produces 50%+ naphtha

Only NGL to yield all products

Utilizes ordinary oil infrastructure

Splitter purpose-built distillation; cut points & overheads for light ends

Splitter can use both, field and plant condensate


NGLs, Petchems & Transport Fuels

NGLs considered petrochemical feedstock

Yet their transport sector impacts at least as great

Condensate a major source gasoline

Can maximize jet or road diesel

Feedstock for reformate

Butane (isomerate), iso-butane (alkylate) can produce components


Condensate Flow


The Many Faces of Condensate

CondensateParaffinic or

N+A Oriented

Condensate Splitter

Refinery

Hydrotreater?

Reformer

Mogas

BTX Plant

Ethylene Cracker

Olefins Manufacture,

i.e. Plastics

Aromatics Manufacture,

i.e. Acrylics, Resins, Styrene

Pyegas

Mogas Components

N+A Naphtha

Paraffinic Naphtha

Reformate

Other

Heavier ProductionKero, Gas Oil, Fuel Oil

Panama Canal & New Horizons

Revamped canal will handle up to 160,000 DWT products

Currently can move crude in VLCC/ULCC lots

NGLs – including condensate – do not boil off – like LNG

USGC condensate has BOTH Atlantic and Pacific Basin markets


Conclusions

We expected limited US DOE reform to reshape condensate definitions/trade

Federal inflexibility will provide opportunities for those who understand the nature of condensate

The misunderstanding surrounding condensate allows for the creation of new export markets

It is important not to limit our vista solely to the Atlantic Basin

Asia Pacific likely to continue to lead global demand growth through 2020

PADD-3 producers should grab a piece of this expected expansion of marketing opportunity


Documents

Condensate in the Cockpit: The Pivotal Role of NGLS … · Condensate in the Cockpit: The Pivotal Role of NGLS in the Emerging Shale Revolution By Al Troner ASIA PACIFIC ENERGY CONSULTING